Understanding The Long-Term Part Time (LTPT) Employees Provision From The Secure Act

The Secure Act makes more part time workers eligible to participate in 401(k) plans. However, many employees may not be able to take advantage of this provision until 2024. In general, under the new law, long-term part-time (LTPT) employees will be credited with all years of service that they worked 500 or more hours. This applies to both 401(k) plans and 403(b) plans.

When Does The LTPT Employees Provision From The Secure Act Kick In?

The Long-Term Part Time Employees Provision from the Secure Act kicks in when an employee works at least 500 hours for two consecutive 12-month periods. They will then be eligible to make salary deferrals in their 401(k) plans or 403(b) plans. This provision is a response to the retirement industry’s pressure on employers to increase their participation in 401(k) and other retirement plan enrollment. It will allow many long-term part-time employees who may have been previously excluded from participating in their employer’s retirement plans to save for their retirement with matching and nondiscrimination contributions, and potentially also with safe harbor profit sharing and nonelective contributions under a safe harbor 401(k) plan. Employers must amend their 401(k) and other retirement plans to comply with the new rules by the last day of the plan year beginning on or after January 1, 2022 (for calendar year plans), with later deadlines for certain collectively bargained plans and governmental plans. The IRS’s Employee Plans Compliance Resolution System correction guidelines are revised to provide additional self-correction options for inadvertent failures to comply with the new requirements.

What Is LTPT?

The SECURE Act, signed into law on December 20, 2019, opened the door to employer sponsored 401(k) plans for long-term part time (LTPT) employees. They can now participate in the plan and make salary deferrals to save for their retirement, even if they have fewer than 1,000 hours worked in a year. However, there are some caveats. Employers are now required to begin tracking LTPT employee’s hours of service for vesting purposes, starting with years prior to 2021. Additionally, LTPT employees who become eligible for a 401(k) plan are excluded from annual non-discrimination testing, coverage testing and top-heavy minimum contributions. This may have a significant impact on small balances in your plan, so it is important to review these procedures with your trusted retirement plan service provider.

How Does LTPT Work?

As explained in a recent ASPPA Winter Symposium session, the SECURE Act amended 401(k) eligibility rules so that long-term part-time (LTPT) employees who complete at least 500 hours of service during three consecutive 12-month periods can elect to make salary deferrals. The new law also eliminated the one-year service waiting period that previously excluded such employees from making 401(k) contributions. The new rule, however, does have a somewhat unexpected effect on the way plan sponsors are required to design their plans. As such, they should review their current plans for potential changes in filing requirements. ERISA attorney Stephen W. Forbes, of Forbes Retirement Plan Consulting, said in a recent ASPPA Winter Symposium that the new LTPT provision is likely to cause some “challenging” issues with clients. For example, he pointed out that it will take an employer’s plan administrator to go back through the employee’s entire work history and determine when an employee had years in which they completed 500 or more hours.

When Will LTPT Have Their Years With 500+ Hours Counted?

Effective for plan years beginning after December 31, 2020, the Long-Term Part Time Employees Provision from the Secure Act requires that 401(k) plans allow long-term part-time employees to make elective deferrals once they reach age 21 and have completed three consecutive 12-month periods during which they worked at least 500 hours. This rule also applies for vesting purposes, even if an LTPT employee later becomes a full-time employee when a 1,000-hour rule would generally apply. As a result, affected 401(k) plan sponsors will need to start tracking the hours of LTPT employees for eligibility purposes beginning in 2021. This is important because if they do not track the hours, these employees will not be eligible to make deferrals in their 401(k) plan in 2024, as the new law does not go into effect until January 1, 2024.